Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Offer an Optional Derived Data Fee for NASDAQ Basic, 47621-47626 [2011-19911]
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Federal Register / Vol. 76, No. 151 / Friday, August 5, 2011 / Notices
reports prepared internally by various
subsidiaries and divisions of MLPF&S.
(ii) Certain senior executives of BAC
with responsibility for overseeing
operations of various divisions,
subsidiaries and affiliates of BAC are
not precluded from exercising those
functions over the Advisor because they
oversee MLPF&S as well; provided that
such persons shall not have any
involvement with respect to proposed
transactions pursuant to the exemption
and will not in any way attempt to
influence or control the placing by the
Funds or the Advisor of orders in
respect of Eligible Securities with
MLPF&S.
8. Record-Keeping Requirements—
The Funds and the Advisor will
maintain such records with respect to
those transactions conducted pursuant
to the exemption as may be necessary to
confirm compliance with the conditions
to the requested relief. In this regard:
(a) Each Fund shall maintain an
itemized daily record of all purchases
and sales of instruments pursuant to the
exemption, showing for each
transaction: the name and quantity of
instruments; the unit purchase or sale
price; the time and date of the
transaction; and whether such
instrument was a First Tier Security or
a Second Tier Security. Such records
also shall, for each transaction,
document two quotations received from
other dealers for comparable
instruments (except that, in the case of
repurchase agreements and consistent
with condition 4, if quotations are
unavailable from two such dealers only
one other competitive quotation is
required), including: the names of the
dealers; the names of the instruments;
the prices quoted; the times and dates
the quotations were received; and
whether such instruments were First
Tier Securities or Second Tier
Securities.
(b) Each Fund shall maintain a ledger
or other record showing, on a daily
basis, the percentage of the Fund’s Total
Assets (or, in the case of a Fund that is
not subject to Rule 2a–7, the percentage
of the total of its cash, cash items and
Eligible Securities) represented by
Second Tier Securities acquired from
MLPF&S.
(c) Each Fund shall maintain records
sufficient to verify compliance with the
volume limitations contained in
condition 3, above. MLPF&S will
provide the Funds with all records and
information necessary to implement this
requirement.
(d) Each Fund shall maintain records
sufficient to verify compliance with the
requirements related to repurchase
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agreements contained in condition 2,
above.
The records required by this
condition 8 will be maintained and
preserved in the same manner as
records required under rule 31a–1(b)(1)
of the Act.
9. Guidelines—MLPF&S and the
Advisor, with the assistance of their
compliance departments, will prepare
and, as necessary, update guidelines for
personnel of the MLPF&S or the
Advisor, as the case may be, to make
certain that transactions conducted
pursuant to the exemption comply with
the conditions set forth therein, and that
the parties generally maintain arm’slength relationships. In training
personnel of MLPF&S, particular
emphasis will be given to the fact that
the Funds are to receive rates as
favorable as other institutional
purchasers buying the same quantities.
The compliance departments of
MLPF&S and the Advisor will
periodically monitor the activities of
MLPF&S and the Advisor to make
certain that the conditions set forth in
the exemption are adhered to.
10. Audit Committee Review—The
audit committee or another committee
which, in each case, consists of
members of the Board who are not
interested persons as defined in section
2(a)(19) of the Act (‘‘Independent
Members’’), will approve, periodically
review and update as necessary,
guidelines for the Advisor and MLPF&S
reasonably designed to ensure that
transactions conducted pursuant to the
exemption comply with the conditions
set forth herein and that the procedures
described herein are followed in all
respects. The respective audit
committees will periodically monitor
the activities of the Funds, the Advisor
and MLPF&S in this regard to ensure
that these matters are being
accomplished.
11. Scope of Exemption—Applicants
expressly acknowledge that any order
issued on the application would grant
relief from section 17(a) of the Act only,
and would not grant relief from any
other section of, or rule under, the Act
including, without limitation, Rule 2a–
7.
12. Board Review—The Board,
including a majority of the Independent
Members, will have approved each
Fund’s participation in transactions
conducted pursuant to the exemption
and determined that such participation
by the Fund is in the best interests of
the Fund and its shareholders. The
minutes of the meeting of the Board at
which this approval is given will reflect
in detail the reasons for the Board’s
determinations. The Boards will review
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no less frequently than annually a
Fund’s participation in transactions
conducted pursuant to the exemption
during the prior year and determine
whether the Fund’s participation in
such transactions continues to be in the
best interests of the Fund and its
shareholders. Such review will include
(but not be limited to): (a) A comparison
of the volume of transactions in each
type of instrument conducted pursuant
to the exemption to the market presence
of MLPF&S in the market for that type
of instrument; and (b) a determination
that the Funds are maintaining
appropriate trading relationships with
other sources for each type of
instrument to ensure that there are
appropriate sources for the quotations
required by condition 4 above. The
minutes of the meetings of the Boards at
which this determination is made will
reflect in detail the reasons for the
Boards’ determinations.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–19852 Filed 8–4–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64994; File No. SR–
NASDAQ–2011–091]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Offer an
Optional Derived Data Fee for NASDAQ
Basic
July 29, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 25,
2011, The NASDAQ Stock Market LLC
(‘‘NASDAQ’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by NASDAQ. The Commission
is publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
NASDAQ proposes to offer an
optional NASDAQ Basic Derived Data
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Current Proposal. NASDAQ will
begin offering a voluntary NASDAQ
Basic Derived Data Fee for nonprofessional usage of data derived from
the NASDAQ Basic product (NASDAQ
Rule 7047), which will cost $1,500 per
month. The $1,500 NASDAQ Basic
Derived Data Fee would be in lieu of the
non-professional subscriber fees only.
Therefore, a customer taking advantage
of this fee will no longer pay nonprofessional subscriber fees. The nonprofessional fees will no longer apply to
those customers taking advantage of this
new fee since they will be able to
redistribute this data (in the manner
described herein) to an unlimited
number of non-professional users.
Customers redistributing this data to
professional customers will still be
liable for the professional user fees.
The NASDAQ Basic Derived Data Fee
would be in addition to the existing
$1,500 per month Distributor Fee in
NASDAQ Rule 7047(c)(1). Therefore,
firms that choose the NASDAQ Basic
Derived Data Fee pay $1,500 to derive
data from NASDAQ Basic plus $1,500
for the NASDAQ Basic Distributor Fee
and, if applicable, NASDAQ Basic
professional subscriber fees. The
NASDAQ Basic Derived Data Fee does
not involve the creation of a new data
feed, but rather is a new pricing option
for an existing data feed. The NASDAQ
Basic Derived Data Fee allows firms to
use the NASDAQ Basic data feed and
display/re-distribute it in a derived
manner. This is not a new service or a
new product. NASDAQ is merely
creating a new fee for a different use of
its data.
Background. NASDAQ disseminates
market data feeds in two capacities.
First, NASDAQ disseminates
consolidated or ‘‘core’’ data in its
capacity as Securities Information
Processor (‘‘SIP’’) for the national
market system plan governing securities
listed on NASDAQ as a national
securities exchange (‘‘NASDAQ UTP
Plan’’).4 Second, NASDAQ separately
disseminates proprietary or ‘‘non-core’’
data in its capacity as a registered
national securities exchange. Non-core
data is any data generated by the
NASDAQ Market Center Execution
System that is voluntarily disseminated
by NASDAQ separate and apart from the
consolidated data.5 NASDAQ has
numerous proprietary data products,
such as NASDAQ TotalView, NASDAQ
Last Sale, and NASDAQ Basic.
NASDAQ continues to seek broader
distribution of non-core data and to
reduce the cost of providing non-core
data to larger numbers of investors. In
the past, NASDAQ has accomplished
this goal in part by offering similar
capped fees, flat fees or enterprise
licenses for professional and nonprofessional usage of TotalView which
contains the full depth of book data for
the NASDAQ Market Center Execution
System. NASDAQ has also implemented
these capped/flat fees with other
products, such as NASDAQ Last Sale.
NASDAQ believes that the adoption of
flat fee structures or enterprise licenses
has led to greater distribution of market
data, particularly among nonprofessional users.
Based on input from market
participants and market data
3 Changes are marked to the rules of The
NASDAQ Stock Market LLC found at https://
nasdaq.cchwallstreet.com.
4 See Securities Exchange Act Release No. 59039
(Dec. 2, 2008) at p. 41.
5 Id.
Fee for distribution of data derived from
an existing NASDAQ Basic data feed to
non-professional users.
The text of the proposed rule change
is below. Proposed new language is in
italics.3
*
*
*
*
*
7047. Nasdaq Basic
(a)–(b) No change.
(c) Distributor Fees.
(1)–(4) No change.
(5) A Distributor may pay $1,500 per
month to distribute data derived from
Nasdaq Basic to an unlimited number of
non-professional subscribers. This fee is
in addition to the Distributor Fee listed
in (c)(1).
(6) The terms ‘‘Distributor’’ and
‘‘Direct Access’’ shall have the same
meanings as set forth in Rule 7019.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASDAQ included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below.
NASDAQ has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
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distributors, NASDAQ believes that this
increase in distribution is attributable in
part to the relief it provides distributors
from the NASDAQ requirement that
distributors count and report each nonprofessional user of NASDAQ
proprietary data. In addition to
increased administrative flexibility, flat
fees and enterprise licenses also
encourage broader distribution by firms
that are currently over the fee cap as
well as those that are approaching the
cap and wish to take advantage of the
benefits of the program. Further,
NASDAQ believes that capping fees in
this manner creates goodwill with
broker-dealers and increases
transparency for non-professional users.
Accordingly, NASDAQ is establishing
the NASDAQ Basic Derived Data Fee for
distributors who derive data from
NASDAQ Basic under NASDAQ Rule
7047(c)(5), a non-professional fee option
for distributors of NASDQ Basic.6 The
NASDAQ Basic Derived Data Fee covers
derived data and consists of pricing data
or other information that is created in
whole or in part from NASDAQ Basic
data (e.g., real-time volume weighted
data).
The NASDAQ Basic Derived Data Fee
is completely optional and does not
impact individual usage fees for any
product or in any way raise the costs of
any user of any NASDAQ data product.
2. Statutory Basis
NASDAQ believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,7 in
general, and with Section 6(b)(4) of the
Act,8 in particular, in that it provides an
equitable allocation of reasonable fees
among users and recipients of NASDAQ
data. In adopting Regulation NMS, the
Commission granted self-regulatory
organizations and broker-dealers
increased authority and flexibility to
offer new and unique market data to the
public. It was believed that this
authority would expand the amount of
data available to consumers, and also
spur innovation and competition for the
provision of market data.
The Commission concluded that
Regulation NMS—by deregulating the
market in proprietary data—would itself
6 NASDAQ relies on distributor self-reporting of
usage rather than on individual contact with each
end-user customer. NASDAQ permits distributors
to designate an entire user population as ‘‘nonprofessional’’ provided that the number of
professional subscribers within that user population
does not exceed ten percent (10%) of the total
population and does not exceed fifty percent (50%)
of the total subscriber population through any one
of the Distributor’s systems.
7 15 U.S.C. 78f.
8 15 U.S.C. 78f(b)(4).
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further the Act’s goals of facilitating
efficiency and competition:
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[E]fficiency is promoted when brokerdealers who do not need the data beyond the
prices, sizes, market center identifications of
the NBBO and consolidated last sale
information are not required to receive (and
pay for) such data. The Commission also
believes that efficiency is promoted when
broker-dealers may choose to receive (and
pay for) additional market data based on their
own internal analysis of the need for such
data.9
By removing ‘‘unnecessary regulatory
restrictions’’ on the ability of exchanges
to sell their own data, Regulation NMS
advanced the goals of the Act and the
principles reflected in its legislative
history. If the free market should
determine whether proprietary data is
sold to broker-dealers at all, it follows
that the price at which such data is sold
should be set by the market as well.
NASDAQ Basic is precisely the sort of
market data product that the
Commission envisioned when it
adopted Regulation NMS.
On July 21, 2010, President Barack
Obama signed into law H.R. 4173, the
Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010
(‘‘Dodd-Frank Act’’), which amended
Section 19 of the Act. Among other
things, Section 916 of the Dodd-Frank
Act amended paragraph (A) of Section
19(b)(3) of the Act by inserting the
phrase ‘‘on any person, whether or not
the person is a member of the selfregulatory organization’’ after ‘‘due, fee
or other charge imposed by the selfregulatory organization.’’ As a result, all
SRO rule proposals establishing or
changing dues, fees, or other charges are
immediately effective upon filing
regardless of whether such dues, fees, or
other charges are imposed on members
of the SRO, non-members, or both.
Section 916 further amended paragraph
(C) of Section 19(b)(3) of the Exchange
Act to read, in pertinent part, ‘‘At any
time within the 60-day period beginning
on the date of filing of such a proposed
rule change in accordance with the
provisions of paragraph (1) [of Section
19(b)], the Commission summarily may
temporarily suspend the change in the
rules of the self-regulatory organization
made thereby, if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of this title. If the Commission
takes such action, the Commission shall
institute proceedings under paragraph
(2)(B) [of Section 19(b)] to determine
9 Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
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whether the proposed rule should be
approved or disapproved.’’
The decision of the United States
Court of Appeals for the District of
Columbia Circuit in NetCoalition v.
SEC, No. 09–1042 (DC Cir. 2010),
although reviewing a Commission
decision made prior to the effective date
of the Dodd-Frank Act, upheld the
Commission’s reliance upon
competitive markets to set reasonable
and equitably allocated fees for market
data. ‘‘In fact, the legislative history
indicates that the Congress intended
that the market system ‘evolve through
the interplay of competitive forces as
unnecessary regulatory restrictions are
removed’ and that the SEC wield its
regulatory power ‘in those situations
where competition may not be
sufficient,’ such as in the creation of a
‘consolidated transactional reporting
system.’ ’’ NetCoalition, at 15 (quoting
H.R. Rep. No. 94–229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321,
323). The court’s conclusions about
Congressional intent are therefore
reinforced by the Dodd-Frank Act
amendments, which create a
presumption that exchange fees,
including market data fees, may take
effect immediately, without prior
Commission approval, and that the
Commission should take action to
suspend a fee change and institute a
proceeding to determine whether the fee
change should be approved or
disapproved only where the
Commission has concerns that the
change may not be consistent with the
Act.
NASDAQ believes that this proposal
is in keeping with those principles by
promoting increased transparency
through the dissemination of NASDAQ
Basic Derived Data. The dissemination
is designed to increase not only
transparency for non-professional users,
but also to reduce burdensome
administrative costs in addition to
actual per user costs. NASDAQ notes
also that NASDAQ Basic data is already
distributed and that this filing proposes
to distribute no additional data
elements. NASDAQ Basic is distributed
and purchased on a voluntary basis, in
that neither NASDAQ nor market data
distributors are required by any rule or
regulation to make this data available.
Accordingly, distributors and users can
discontinue use at any time and for any
reason, including due to an assessment
of the reasonableness of fees charged.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASDAQ does not believe that the
proposed rule change will result in any
burden on competition that is not
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necessary or appropriate in furtherance
of the purposes of the Act, as amended.
Notwithstanding its determination that
the Commission may rely upon
competition to establish fair and
equitably allocated fees for market data,
the NetCoalition court found that the
Commission had not, in that case,
compiled a record that adequately
supported its conclusion that the market
for the data at issue in the case was
competitive. NASDAQ believes that a
record may readily be established to
demonstrate the competitive nature of
the market in question.
There is intense competition between
trading platforms that provide
transaction execution and routing
services and proprietary data products.
Transaction execution and proprietary
data products are complementary in that
market data is both an input and a
byproduct of the execution service. In
fact, market data and trade execution are
a paradigmatic example of joint
products with joint costs. The decision
whether and on which platform to post
an order will depend on the attributes
of the platform where the order can be
posted, including the execution fees,
data quality and price and distribution
of its data products. Without the
prospect of a taking order seeing and
reacting to a posted order on a particular
platform, the posting of the order would
accomplish little. Without trade
executions, exchange data products
cannot exist. Data products are valuable
to many end users only insofar as they
provide information that end users
expect will assist them or their
customers in making trading decisions.
The costs of producing market data
include not only the costs of the data
distribution infrastructure, but also the
costs of designing, maintaining, and
operating the exchange’s transaction
execution platform and the cost of
regulating the exchange to ensure its fair
operation and maintain investor
confidence. The total return that a
trading platform earns reflects the
revenues it receives from both products
and the joint costs it incurs. Moreover,
an exchange’s customers view the costs
of transaction executions and of data as
a unified cost of doing business with the
exchange. A broker-dealer will direct
orders to a particular exchange only if
the expected revenues from executing
trades on the exchange exceed net
transaction execution costs and the cost
of data that the broker-dealer chooses to
buy to support its trading decisions (or
those of its customers). The choice of
data products is, in turn, a product of
the value of the products in making
profitable trading decisions. If the cost
of the product exceeds its expected
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value, the broker-dealer will choose not
to buy it. Moreover, as a broker-dealer
chooses to direct fewer orders to a
particular exchange, the value of the
product to that broker-dealer decreases,
for two reasons. First, the product will
contain less information, because
executions of the broker-dealer’s orders
will not be reflected in it. Second, and
perhaps more important, the product
will be less valuable to that brokerdealer because it does not provide
information about the venue to which it
is directing its orders. Data from the
competing venue to which the brokerdealer is directing orders will become
correspondingly more valuable.
Thus, a super-competitive increase in
the fees charged for either transactions
or data has the potential to impair
revenues from both products. ‘‘No one
disputes that competition for order flow
is ‘fierce’.’’ NetCoalition at 24. However,
the existence of fierce competition for
order flow implies a high degree of price
sensitivity on the part of broker-dealers
with order flow, since they may readily
reduce costs by directing orders toward
the lowest-cost trading venues. A
broker-dealer that shifted its order flow
from one platform to another in
response to order execution price
differentials would both reduce the
value of that platform’s market data and
reduce its own need to consume data
from the disfavored platform. Similarly,
if a platform increases its market data
fees, the change will affect the overall
cost of doing business with the
platform, and affected broker-dealers
will assess whether they can lower their
trading costs by directing orders
elsewhere and thereby lessening the
need for the more expensive data.
Analyzing the cost of market data
distribution in isolation from the cost of
all of the inputs supporting the creation
of market data will inevitably
underestimate the cost of the data. Thus,
because it is impossible to create data
without a fast, technologically robust,
and well-regulated execution system,
system costs and regulatory costs affect
the price of market data. It would be
equally misleading, however, to
attribute all of the exchange’s costs to
the market data portion of an exchange’s
joint product. Rather, all of the
exchange’s costs are incurred for the
unified purposes of attracting order
flow, executing and/or routing orders,
and generating and selling data about
market activity. The total return that an
exchange earns reflects the revenues it
receives from the joint products and the
total costs of the joint products.
Competition among trading platforms
can be expected to constrain the
aggregate return each platform earns
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from the sale of its joint products, but
different platforms may choose from a
range of possible, and equally
reasonable, pricing strategies as the
means of recovering total costs. For
example, some platform may choose to
pay rebates to attract orders, charge
relatively low prices for market
information (or provide information free
of charge) and charge relatively high
prices for accessing posted liquidity.
Other platforms may choose a strategy
of paying lower rebates (or no rebates)
to attract orders, setting relatively high
prices for market information, and
setting relatively low prices for
accessing posted liquidity. In this
environment, there is no economic basis
for regulating maximum prices for one
of the joint products in an industry in
which suppliers face competitive
constraints with regard to the joint
offering. This would be akin to strictly
regulating the price that an automobile
manufacturer can charge for car sound
systems despite the existence of a highly
competitive market for cars and the
availability of after-market alternatives
to the manufacturer-supplied system.
The market for market data products
is competitive and inherently
contestable because there is fierce
competition for the inputs necessary to
the creation of proprietary data and
strict pricing discipline for the
proprietary products themselves.
Numerous exchanges compete with
each other for listings, trades, and
market data itself, providing virtually
limitless opportunities for entrepreneurs
who wish to produce and distribute
their own market data. This proprietary
data is produced by each individual
exchange, as well as other entities, in a
vigorously competitive market.
Broker-dealers currently have
numerous alternative venues for their
order flow, including ten self-regulatory
organization (‘‘SRO’’) markets, as well
as internalizing broker-dealers (‘‘BDs’’)
and various forms of alternative trading
systems (‘‘ATSs’’), including dark pools
and electronic communication networks
(‘‘ECNs’’). Each SRO market competes to
produce transaction reports via trade
executions, and two FINRA-regulated
Trade Reporting Facilities (‘‘TRFs’’)
compete to attract internalized
transaction reports. Competitive markets
for order flow, executions, and
transaction reports provide pricing
discipline for the inputs of proprietary
data products.
The large number of SROs, TRFs, BDs,
and ATSs that currently produce
proprietary data or are currently capable
of producing it provides further pricing
discipline for proprietary data products.
Each SRO, TRF, ATS, and BD is
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currently permitted to produce
proprietary data products, and many
currently do or have announced plans to
do so, including NASDAQ, NYSE,
NYSE Amex, NYSEArca, and BATS.
Any ATS or BD can combine with any
other ATS, BD, or multiple ATSs or BDs
to produce joint proprietary data
products. Additionally, order routers
and market data vendors can facilitate
single or multiple broker-dealers’
production of proprietary data products.
The potential sources of proprietary
products are virtually limitless.
The fact that proprietary data from
ATSs, BDs, and vendors can by-pass
SROs is significant in two respects.
First, non-SROs can compete directly
with SROs for the production and sale
of proprietary data products, as BATS
and Arca did before registering as
exchanges by publishing proprietary
book data on the Internet. Second,
because a single order or transaction
report can appear in an SRO proprietary
product, a non-SRO proprietary
product, or both, the data available in
proprietary products is exponentially
greater than the actual number of orders
and transaction reports that exist in the
marketplace.
Market data vendors provide another
form of price discipline for proprietary
data products because they control the
primary means of access to end users.
Vendors impose price restraints based
upon their business models. For
example, vendors such as Bloomberg
and Reuters that assess a surcharge on
data they sell may refuse to offer
proprietary products that end users will
not purchase in sufficient numbers.
Internet portals, such as Yahoo, impose
a discipline by providing only data that
will enable them to attract ‘‘eyeballs’’
that contribute to their advertising
revenue. Retail broker-dealers, such as
Schwab and Fidelity, offer their
customers proprietary data only if it
promotes trading and generates
sufficient commission revenue.
Although the business models may
differ, these vendors’ pricing discipline
is the same: They can simply refuse to
purchase any proprietary data product
that fails to provide sufficient value.
NASDAQ and other producers of
proprietary data products must
understand and respond to these
varying business models and pricing
disciplines in order to market
proprietary data products successfully.
In addition to the competition and
price discipline described above, the
market for proprietary data products is
also highly contestable because market
entry is rapid, inexpensive, and
profitable. The history of electronic
trading is replete with examples of
E:\FR\FM\05AUN1.SGM
05AUN1
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Federal Register / Vol. 76, No. 151 / Friday, August 5, 2011 / Notices
entrants that swiftly grew into some of
the largest electronic trading platforms
and proprietary data producers:
Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN,
BATS Trading and Direct Edge. A
proliferation of dark pools and other
ATSs operate profitably with
fragmentary shares of consolidated
market volume.
Regulation NMS, by deregulating the
market for proprietary data, has
increased the contestability of that
market. While broker-dealers have
previously published their proprietary
data individually, Regulation NMS
encourages market data vendors and
broker-dealers to produce proprietary
products cooperatively in a manner
never before possible. Multiple market
data vendors already have the capability
to aggregate data and disseminate it on
a profitable scale, including Bloomberg,
and Thomson-Reuters.
The court in NetCoalition concluded
that the Commission had failed to
demonstrate that the market for market
data was competitive based on the
reasoning of the Commission’s
NetCoalition order because, in the
court’s view, the Commission had not
adequately demonstrated that the depthof-book data at issue in the case is used
to attract order flow. NASDAQ believes,
however, that evidence not before the
court clearly demonstrates that
availability of depth data attracts order
flow. For example, NASDAQ submits
that in and of itself, NASDAQ’s decision
voluntarily to cap fees on existing
products, as is the effect of a flat fee or
an enterprise license, is evidence of
market forces at work.
The court in NetCoalition did cite
favorably an economic study by Ordover
and Bamberger which concluded that
‘‘[a]lthough an exchange may price its
trade execution fees higher and its
market data fees lower (or vice versa),
because of ‘‘platform’’ competition the
exchange nonetheless receives the same
return from the two ‘‘joint products’’ in
the aggregate.’’ 10 Ordover and
Bamberger also provided additional
comments expanding upon the impact
of platform competition.11 Among the
conclusions that Ordover and
Bamberger reach are: NASDAQ is
subject to significant competitive forces
in setting the prices and other terms of
execution services and proprietary data
products.
Competition among trading platforms
can be expected to constrain the
10 See
NetCoalition at fn. 16.
Securities Exchange Act Release No. 63745
(Jan. 20, 2011); 76 FR 4970 (Jan. 27, 2011) (SR–
NASDAQ–2011–010) (attached to original filing as
Exhibit 3).
11 See
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aggregate return each platform earns
from the sale of the array of its products,
including the joint products at issue
here. In particular, cross-platform
competition, and the adverse effects
from overpricing proprietary
information on the volume of trading on
the platform, constrain the pricing of
proprietary information.
Competitive forces constrain the
prices that platforms can charge for noncore market information. A trading
platform cannot generate market
information unless it receives trade
orders. For this reason, a platform can
be expected to use its market data
product as a tool for attracting liquidity
and trading to its exchange.
While, by definition, information that
is proprietary to an exchange cannot be
obtained elsewhere, this does not enable
the owner of such information to
exercise monopoly power over that
`
information vis-a-vis firms with the
need for such information. Even though
market information from one platform
may not be a perfect substitute for
market information from one or more
other platforms, the existence of
alternative sources of information can
be expected to constrain the prices
platforms charge for market data.
Besides the fact that similar
information can be obtained elsewhere,
the feasibility of supra-competitive
pricing is constrained by the traders’
ability to shift their trades elsewhere,
which lowers the activity on the
exchange and so in the long run reduces
the quality of the information generated
by the exchange.
Competition among platforms has
driven NASDAQ continually to improve
its platform data offerings and to cater
to customers’ data needs. For example,
NASDAQ has developed and
maintained multiple delivery
mechanisms (IP, multi-cast, and
compression) that enable customers to
receive data in the form and manner
they prefer and at the lowest cost to
them. NASDAQ offers front end
applications such as its ‘‘Bookviewer’’
to help customers utilize data. NASDAQ
has created new products like
TotalView Aggregate to complement
TotalView ITCH and Level 2, because
offering data in multiple formatting
allows NASDAQ to better fit customer
needs. NASDAQ offers data via multiple
extranet providers, thereby helping to
reduce network and total cost for its
data products. NASDAQ has developed
an online administrative system to
provide customers transparency into
their data feed requests and streamline
data usage reporting. NASDAQ has also
expanded its flat fee or enterprise
license options to reduce the
PO 00000
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47625
administrative burden and costs to firms
that purchase market data.
Despite these enhancements and a
dramatic increase in message traffic,
NASDAQ’s fees for depth-of-book data
have remained flat. In fact, as a percent
of total customer costs, NASDAQ data
fees have fallen relative to other data
usage costs—including bandwidth,
programming, and infrastructure—that
have risen. The same holds true for
execution services; despite numerous
enhancements to NASDAQ’s trading
platform, absolute and relative trading
costs have declined. Platform
competition has intensified as new
entrants have emerged, constraining
prices for both executions and for data.
The vigor of competition for non-core
data information is significant and the
Exchange believes that this proposal
clearly evidences such competition.
NASDAQ is offering a new pricing
model in order to keep pace with
changes in the industry and evolving
customer needs. It is entirely optional
and is geared towards attracting new
customers, as well as retaining existing
customers.
The Exchange has witnessed
competitors creating new products and
innovative pricing in this space over the
course of the past year. NASDAQ
continues to see firms challenge its
pricing on the basis of the Exchange’s
explicit fees being higher than the zeropriced fees from other competitors such
as BATS. In all cases, firms make
decisions on how much and what types
of data to consume on the basis of the
total cost of interacting with NASDAQ
or other exchanges. Of course, the
explicit data fees are but one factor in
a total platform analysis. Some
competitors have lower transactions fees
and higher data fees, and others are vice
versa. The market for this non-core data
information is highly competitive and
continually evolves as products develop
and change.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.12 At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
12 15
E:\FR\FM\05AUN1.SGM
U.S.C. 78s(b)(3)(a)(ii).
05AUN1
47626
Federal Register / Vol. 76, No. 151 / Friday, August 5, 2011 / Notices
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
erowe on DSKG8SOYB1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2011–091 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2011–091. This
file number should be included on the
subject line if e-mail is used.
To help the Commission process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room on official business
days between the hours of 10 a.m. and
3 p.m. Copies of such filing also will be
available for inspection and copying at
the principal offices of the Exchange.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
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15:16 Aug 04, 2011
Jkt 223001
submissions should refer to File
Number SR–NASDAQ–2011–091, and
should be submitted on or before
August 26, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–19911 Filed 8–4–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64997; File No. SR–NYSE–
2011–37]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending the
Fees Charged for the Floor Member
Continuing Education Program for
Qualified Floor Members Pursuant to
NYSE Rule 103A, From a Fixed Flat Fee
of $80 Per Training Module to a Fixed
Flat Fee of $150 Per Qualified Member
Per Bi-Annual Session for a Total Cost
Per Member Per Year of $300
August 1, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on July 21,
2011, New York Stock Exchange LLC
(the ‘‘Exchange’’ or ‘‘NYSE’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend,
effective immediately, the fees charged
for the Floor Member Continuing
Education Program for qualified Floor
members pursuant to NYSE Rule 103A,
from a fixed flat fee of $80 per training
module to a fixed flat fee of $150 per
qualified member per bi-annual session
for a total cost per member per year of
$300. The text of the proposed rule
change is available at the Exchange, at
https://www.nyse.com, at the
Commission’s Public Reference Room,
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Sfmt 4703
and at the Commission’s Web site at
https://www.sec.gov.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
As required by NYSE Rule 103A, the
Exchange provides Floor members with
mandatory continuing education
program, known as the Floor Member
Continuing Education Program (‘‘FMCE
Program’’). Since June 14, 2010, the
Financial Industry Regulatory Authority
(‘‘FINRA’’) has been developing and
administering the FMCE Program on the
Exchange’s behalf pursuant to a
regulatory services agreement.
The Exchange proposes to amend,
effective immediately, the fees charged
for the FMCE Program. Currently,
members pay a fee of $80 per training
module. Because the number of
modules that the Exchange administers
per year can vary (ranging from four to
six modules per year), Floor members
are currently faced with a level of
uncertainty of the amount of fees that
they may be charged in connection with
the FMCE program. In addition, because
modules can be issued throughout the
year, Floor members face additional
uncertainty as to when such fees will be
charged.
To eliminate this uncertainty, the
Exchange proposes to delete the per
module fee and instead charge a flat
$150 fee per session per member per
year, with two sessions a year
amounting to a total of $300 total
charges per year for the FMCE Program.
Consistent with Rule 103A and current
practice, each session will include two
to three modules of education
programming, for a total of four to six
modules per year. Accordingly, this
proposed fee change will not impact the
quantity or quality of educational
training that will be issued to Floor
members. Rather, the same level of
E:\FR\FM\05AUN1.SGM
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]]>Agencies
[Federal Register Volume 76, Number 151 (Friday, August 5, 2011)]
[Notices]
[Pages 47621-47626]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19911]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64994; File No. SR-NASDAQ-2011-091]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Offer an Optional Derived Data Fee for NASDAQ Basic
July 29, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 25, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by NASDAQ. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
NASDAQ proposes to offer an optional NASDAQ Basic Derived Data
[[Page 47622]]
Fee for distribution of data derived from an existing NASDAQ Basic data
feed to non-professional users.
The text of the proposed rule change is below. Proposed new
language is in italics.\3\
---------------------------------------------------------------------------
\3\ Changes are marked to the rules of The NASDAQ Stock Market
LLC found at https://nasdaq.cchwallstreet.com.
---------------------------------------------------------------------------
* * * * *
7047. Nasdaq Basic
(a)-(b) No change.
(c) Distributor Fees.
(1)-(4) No change.
(5) A Distributor may pay $1,500 per month to distribute data
derived from Nasdaq Basic to an unlimited number of non-professional
subscribers. This fee is in addition to the Distributor Fee listed in
(c)(1).
(6) The terms ``Distributor'' and ``Direct Access'' shall have the
same meanings as set forth in Rule 7019.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASDAQ included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASDAQ has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Current Proposal. NASDAQ will begin offering a voluntary NASDAQ
Basic Derived Data Fee for non-professional usage of data derived from
the NASDAQ Basic product (NASDAQ Rule 7047), which will cost $1,500 per
month. The $1,500 NASDAQ Basic Derived Data Fee would be in lieu of the
non-professional subscriber fees only. Therefore, a customer taking
advantage of this fee will no longer pay non-professional subscriber
fees. The non-professional fees will no longer apply to those customers
taking advantage of this new fee since they will be able to
redistribute this data (in the manner described herein) to an unlimited
number of non-professional users. Customers redistributing this data to
professional customers will still be liable for the professional user
fees.
The NASDAQ Basic Derived Data Fee would be in addition to the
existing $1,500 per month Distributor Fee in NASDAQ Rule 7047(c)(1).
Therefore, firms that choose the NASDAQ Basic Derived Data Fee pay
$1,500 to derive data from NASDAQ Basic plus $1,500 for the NASDAQ
Basic Distributor Fee and, if applicable, NASDAQ Basic professional
subscriber fees. The NASDAQ Basic Derived Data Fee does not involve the
creation of a new data feed, but rather is a new pricing option for an
existing data feed. The NASDAQ Basic Derived Data Fee allows firms to
use the NASDAQ Basic data feed and display/re-distribute it in a
derived manner. This is not a new service or a new product. NASDAQ is
merely creating a new fee for a different use of its data.
Background. NASDAQ disseminates market data feeds in two
capacities. First, NASDAQ disseminates consolidated or ``core'' data in
its capacity as Securities Information Processor (``SIP'') for the
national market system plan governing securities listed on NASDAQ as a
national securities exchange (``NASDAQ UTP Plan'').\4\ Second, NASDAQ
separately disseminates proprietary or ``non-core'' data in its
capacity as a registered national securities exchange. Non-core data is
any data generated by the NASDAQ Market Center Execution System that is
voluntarily disseminated by NASDAQ separate and apart from the
consolidated data.\5\ NASDAQ has numerous proprietary data products,
such as NASDAQ TotalView, NASDAQ Last Sale, and NASDAQ Basic.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 59039 (Dec. 2, 2008)
at p. 41.
\5\ Id.
---------------------------------------------------------------------------
NASDAQ continues to seek broader distribution of non-core data and
to reduce the cost of providing non-core data to larger numbers of
investors. In the past, NASDAQ has accomplished this goal in part by
offering similar capped fees, flat fees or enterprise licenses for
professional and non-professional usage of TotalView which contains the
full depth of book data for the NASDAQ Market Center Execution System.
NASDAQ has also implemented these capped/flat fees with other products,
such as NASDAQ Last Sale. NASDAQ believes that the adoption of flat fee
structures or enterprise licenses has led to greater distribution of
market data, particularly among non-professional users.
Based on input from market participants and market data
distributors, NASDAQ believes that this increase in distribution is
attributable in part to the relief it provides distributors from the
NASDAQ requirement that distributors count and report each non-
professional user of NASDAQ proprietary data. In addition to increased
administrative flexibility, flat fees and enterprise licenses also
encourage broader distribution by firms that are currently over the fee
cap as well as those that are approaching the cap and wish to take
advantage of the benefits of the program. Further, NASDAQ believes that
capping fees in this manner creates goodwill with broker-dealers and
increases transparency for non-professional users.
Accordingly, NASDAQ is establishing the NASDAQ Basic Derived Data
Fee for distributors who derive data from NASDAQ Basic under NASDAQ
Rule 7047(c)(5), a non-professional fee option for distributors of
NASDQ Basic.\6\ The NASDAQ Basic Derived Data Fee covers derived data
and consists of pricing data or other information that is created in
whole or in part from NASDAQ Basic data (e.g., real-time volume
weighted data).
---------------------------------------------------------------------------
\6\ NASDAQ relies on distributor self-reporting of usage rather
than on individual contact with each end-user customer. NASDAQ
permits distributors to designate an entire user population as
``non-professional'' provided that the number of professional
subscribers within that user population does not exceed ten percent
(10%) of the total population and does not exceed fifty percent
(50%) of the total subscriber population through any one of the
Distributor's systems.
---------------------------------------------------------------------------
The NASDAQ Basic Derived Data Fee is completely optional and does
not impact individual usage fees for any product or in any way raise
the costs of any user of any NASDAQ data product.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\7\ in general, and with Section
6(b)(4) of the Act,\8\ in particular, in that it provides an equitable
allocation of reasonable fees among users and recipients of NASDAQ
data. In adopting Regulation NMS, the Commission granted self-
regulatory organizations and broker-dealers increased authority and
flexibility to offer new and unique market data to the public. It was
believed that this authority would expand the amount of data available
to consumers, and also spur innovation and competition for the
provision of market data.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f.
\8\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
The Commission concluded that Regulation NMS--by deregulating the
market in proprietary data--would itself
[[Page 47623]]
---------------------------------------------------------------------------
further the Act's goals of facilitating efficiency and competition:
[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\9\
---------------------------------------------------------------------------
\9\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496 (June 29, 2005).
By removing ``unnecessary regulatory restrictions'' on the ability of
exchanges to sell their own data, Regulation NMS advanced the goals of
the Act and the principles reflected in its legislative history. If the
free market should determine whether proprietary data is sold to
broker-dealers at all, it follows that the price at which such data is
sold should be set by the market as well. NASDAQ Basic is precisely the
sort of market data product that the Commission envisioned when it
---------------------------------------------------------------------------
adopted Regulation NMS.
On July 21, 2010, President Barack Obama signed into law H.R. 4173,
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of
Section 19(b)(3) of the Act by inserting the phrase ``on any person,
whether or not the person is a member of the self-regulatory
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals
establishing or changing dues, fees, or other charges are immediately
effective upon filing regardless of whether such dues, fees, or other
charges are imposed on members of the SRO, non-members, or both.
Section 916 further amended paragraph (C) of Section 19(b)(3) of the
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule
change in accordance with the provisions of paragraph (1) [of Section
19(b)], the Commission summarily may temporarily suspend the change in
the rules of the self-regulatory organization made thereby, if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of this title. If the Commission takes
such action, the Commission shall institute proceedings under paragraph
(2)(B) [of Section 19(b)] to determine whether the proposed rule should
be approved or disapproved.''
The decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoalition v. SEC, No. 09-1042 (DC Cir. 2010),
although reviewing a Commission decision made prior to the effective
date of the Dodd-Frank Act, upheld the Commission's reliance upon
competitive markets to set reasonable and equitably allocated fees for
market data. ``In fact, the legislative history indicates that the
Congress intended that the market system `evolve through the interplay
of competitive forces as unnecessary regulatory restrictions are
removed' and that the SEC wield its regulatory power `in those
situations where competition may not be sufficient,' such as in the
creation of a `consolidated transactional reporting system.' ''
NetCoalition, at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court's conclusions about
Congressional intent are therefore reinforced by the Dodd-Frank Act
amendments, which create a presumption that exchange fees, including
market data fees, may take effect immediately, without prior Commission
approval, and that the Commission should take action to suspend a fee
change and institute a proceeding to determine whether the fee change
should be approved or disapproved only where the Commission has
concerns that the change may not be consistent with the Act.
NASDAQ believes that this proposal is in keeping with those
principles by promoting increased transparency through the
dissemination of NASDAQ Basic Derived Data. The dissemination is
designed to increase not only transparency for non-professional users,
but also to reduce burdensome administrative costs in addition to
actual per user costs. NASDAQ notes also that NASDAQ Basic data is
already distributed and that this filing proposes to distribute no
additional data elements. NASDAQ Basic is distributed and purchased on
a voluntary basis, in that neither NASDAQ nor market data distributors
are required by any rule or regulation to make this data available.
Accordingly, distributors and users can discontinue use at any time and
for any reason, including due to an assessment of the reasonableness of
fees charged.
B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Notwithstanding its
determination that the Commission may rely upon competition to
establish fair and equitably allocated fees for market data, the
NetCoalition court found that the Commission had not, in that case,
compiled a record that adequately supported its conclusion that the
market for the data at issue in the case was competitive. NASDAQ
believes that a record may readily be established to demonstrate the
competitive nature of the market in question.
There is intense competition between trading platforms that provide
transaction execution and routing services and proprietary data
products. Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platform where the order can be posted, including the
execution fees, data quality and price and distribution of its data
products. Without the prospect of a taking order seeing and reacting to
a posted order on a particular platform, the posting of the order would
accomplish little. Without trade executions, exchange data products
cannot exist. Data products are valuable to many end users only insofar
as they provide information that end users expect will assist them or
their customers in making trading decisions.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's
customers view the costs of transaction executions and of data as a
unified cost of doing business with the exchange. A broker-dealer will
direct orders to a particular exchange only if the expected revenues
from executing trades on the exchange exceed net transaction execution
costs and the cost of data that the broker-dealer chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected
[[Page 47624]]
value, the broker-dealer will choose not to buy it. Moreover, as a
broker-dealer chooses to direct fewer orders to a particular exchange,
the value of the product to that broker-dealer decreases, for two
reasons. First, the product will contain less information, because
executions of the broker-dealer's orders will not be reflected in it.
Second, and perhaps more important, the product will be less valuable
to that broker-dealer because it does not provide information about the
venue to which it is directing its orders. Data from the competing
venue to which the broker-dealer is directing orders will become
correspondingly more valuable.
Thus, a super-competitive increase in the fees charged for either
transactions or data has the potential to impair revenues from both
products. ``No one disputes that competition for order flow is
`fierce'.'' NetCoalition at 24. However, the existence of fierce
competition for order flow implies a high degree of price sensitivity
on the part of broker-dealers with order flow, since they may readily
reduce costs by directing orders toward the lowest-cost trading venues.
A broker-dealer that shifted its order flow from one platform to
another in response to order execution price differentials would both
reduce the value of that platform's market data and reduce its own need
to consume data from the disfavored platform. Similarly, if a platform
increases its market data fees, the change will affect the overall cost
of doing business with the platform, and affected broker-dealers will
assess whether they can lower their trading costs by directing orders
elsewhere and thereby lessening the need for the more expensive data.
Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's joint product. Rather, all of the exchange's
costs are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data about
market activity. The total return that an exchange earns reflects the
revenues it receives from the joint products and the total costs of the
joint products.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. For example, some platform may choose to pay rebates to
attract orders, charge relatively low prices for market information (or
provide information free of charge) and charge relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower rebates (or no rebates) to attract orders, setting
relatively high prices for market information, and setting relatively
low prices for accessing posted liquidity. In this environment, there
is no economic basis for regulating maximum prices for one of the joint
products in an industry in which suppliers face competitive constraints
with regard to the joint offering. This would be akin to strictly
regulating the price that an automobile manufacturer can charge for car
sound systems despite the existence of a highly competitive market for
cars and the availability of after-market alternatives to the
manufacturer-supplied system.
The market for market data products is competitive and inherently
contestable because there is fierce competition for the inputs
necessary to the creation of proprietary data and strict pricing
discipline for the proprietary products themselves. Numerous exchanges
compete with each other for listings, trades, and market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to produce and distribute their own market data. This proprietary data
is produced by each individual exchange, as well as other entities, in
a vigorously competitive market.
Broker-dealers currently have numerous alternative venues for their
order flow, including ten self-regulatory organization (``SRO'')
markets, as well as internalizing broker-dealers (``BDs'') and various
forms of alternative trading systems (``ATSs''), including dark pools
and electronic communication networks (``ECNs''). Each SRO market
competes to produce transaction reports via trade executions, and two
FINRA-regulated Trade Reporting Facilities (``TRFs'') compete to
attract internalized transaction reports. Competitive markets for order
flow, executions, and transaction reports provide pricing discipline
for the inputs of proprietary data products.
The large number of SROs, TRFs, BDs, and ATSs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO, TRF, ATS, and BD is currently permitted to produce proprietary
data products, and many currently do or have announced plans to do so,
including NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple
broker-dealers' production of proprietary data products. The potential
sources of proprietary products are virtually limitless.
The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products, as BATS and Arca did before registering as exchanges by
publishing proprietary book data on the Internet. Second, because a
single order or transaction report can appear in an SRO proprietary
product, a non-SRO proprietary product, or both, the data available in
proprietary products is exponentially greater than the actual number of
orders and transaction reports that exist in the marketplace.
Market data vendors provide another form of price discipline for
proprietary data products because they control the primary means of
access to end users. Vendors impose price restraints based upon their
business models. For example, vendors such as Bloomberg and Reuters
that assess a surcharge on data they sell may refuse to offer
proprietary products that end users will not purchase in sufficient
numbers. Internet portals, such as Yahoo, impose a discipline by
providing only data that will enable them to attract ``eyeballs'' that
contribute to their advertising revenue. Retail broker-dealers, such as
Schwab and Fidelity, offer their customers proprietary data only if it
promotes trading and generates sufficient commission revenue. Although
the business models may differ, these vendors' pricing discipline is
the same: They can simply refuse to purchase any proprietary data
product that fails to provide sufficient value. NASDAQ and other
producers of proprietary data products must understand and respond to
these varying business models and pricing disciplines in order to
market proprietary data products successfully.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with examples of
[[Page 47625]]
entrants that swiftly grew into some of the largest electronic trading
platforms and proprietary data producers: Archipelago, Bloomberg
Tradebook, Island, RediBook, Attain, TracECN, BATS Trading and Direct
Edge. A proliferation of dark pools and other ATSs operate profitably
with fragmentary shares of consolidated market volume.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While broker-dealers
have previously published their proprietary data individually,
Regulation NMS encourages market data vendors and broker-dealers to
produce proprietary products cooperatively in a manner never before
possible. Multiple market data vendors already have the capability to
aggregate data and disseminate it on a profitable scale, including
Bloomberg, and Thomson-Reuters.
The court in NetCoalition concluded that the Commission had failed
to demonstrate that the market for market data was competitive based on
the reasoning of the Commission's NetCoalition order because, in the
court's view, the Commission had not adequately demonstrated that the
depth-of-book data at issue in the case is used to attract order flow.
NASDAQ believes, however, that evidence not before the court clearly
demonstrates that availability of depth data attracts order flow. For
example, NASDAQ submits that in and of itself, NASDAQ's decision
voluntarily to cap fees on existing products, as is the effect of a
flat fee or an enterprise license, is evidence of market forces at
work.
The court in NetCoalition did cite favorably an economic study by
Ordover and Bamberger which concluded that ``[a]lthough an exchange may
price its trade execution fees higher and its market data fees lower
(or vice versa), because of ``platform'' competition the exchange
nonetheless receives the same return from the two ``joint products'' in
the aggregate.'' \10\ Ordover and Bamberger also provided additional
comments expanding upon the impact of platform competition.\11\ Among
the conclusions that Ordover and Bamberger reach are: NASDAQ is subject
to significant competitive forces in setting the prices and other terms
of execution services and proprietary data products.
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\10\ See NetCoalition at fn. 16.
\11\ See Securities Exchange Act Release No. 63745 (Jan. 20,
2011); 76 FR 4970 (Jan. 27, 2011) (SR-NASDAQ-2011-010) (attached to
original filing as Exhibit 3).
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Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of the array of
its products, including the joint products at issue here. In
particular, cross-platform competition, and the adverse effects from
overpricing proprietary information on the volume of trading on the
platform, constrain the pricing of proprietary information.
Competitive forces constrain the prices that platforms can charge
for non-core market information. A trading platform cannot generate
market information unless it receives trade orders. For this reason, a
platform can be expected to use its market data product as a tool for
attracting liquidity and trading to its exchange.
While, by definition, information that is proprietary to an
exchange cannot be obtained elsewhere, this does not enable the owner
of such information to exercise monopoly power over that information
vis-[agrave]-vis firms with the need for such information. Even though
market information from one platform may not be a perfect substitute
for market information from one or more other platforms, the existence
of alternative sources of information can be expected to constrain the
prices platforms charge for market data.
Besides the fact that similar information can be obtained
elsewhere, the feasibility of supra-competitive pricing is constrained
by the traders' ability to shift their trades elsewhere, which lowers
the activity on the exchange and so in the long run reduces the quality
of the information generated by the exchange.
Competition among platforms has driven NASDAQ continually to
improve its platform data offerings and to cater to customers' data
needs. For example, NASDAQ has developed and maintained multiple
delivery mechanisms (IP, multi-cast, and compression) that enable
customers to receive data in the form and manner they prefer and at the
lowest cost to them. NASDAQ offers front end applications such as its
``Bookviewer'' to help customers utilize data. NASDAQ has created new
products like TotalView Aggregate to complement TotalView ITCH and
Level 2, because offering data in multiple formatting allows NASDAQ to
better fit customer needs. NASDAQ offers data via multiple extranet
providers, thereby helping to reduce network and total cost for its
data products. NASDAQ has developed an online administrative system to
provide customers transparency into their data feed requests and
streamline data usage reporting. NASDAQ has also expanded its flat fee
or enterprise license options to reduce the administrative burden and
costs to firms that purchase market data.
Despite these enhancements and a dramatic increase in message
traffic, NASDAQ's fees for depth-of-book data have remained flat. In
fact, as a percent of total customer costs, NASDAQ data fees have
fallen relative to other data usage costs--including bandwidth,
programming, and infrastructure--that have risen. The same holds true
for execution services; despite numerous enhancements to NASDAQ's
trading platform, absolute and relative trading costs have declined.
Platform competition has intensified as new entrants have emerged,
constraining prices for both executions and for data.
The vigor of competition for non-core data information is
significant and the Exchange believes that this proposal clearly
evidences such competition. NASDAQ is offering a new pricing model in
order to keep pace with changes in the industry and evolving customer
needs. It is entirely optional and is geared towards attracting new
customers, as well as retaining existing customers.
The Exchange has witnessed competitors creating new products and
innovative pricing in this space over the course of the past year.
NASDAQ continues to see firms challenge its pricing on the basis of the
Exchange's explicit fees being higher than the zero-priced fees from
other competitors such as BATS. In all cases, firms make decisions on
how much and what types of data to consume on the basis of the total
cost of interacting with NASDAQ or other exchanges. Of course, the
explicit data fees are but one factor in a total platform analysis.
Some competitors have lower transactions fees and higher data fees, and
others are vice versa. The market for this non-core data information is
highly competitive and continually evolves as products develop and
change.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\12\ At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend
[[Page 47626]]
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
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\12\ 15 U.S.C. 78s(b)(3)(a)(ii).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2011-091 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2011-091. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room on
official business days between the hours of 10 a.m. and 3 p.m. Copies
of such filing also will be available for inspection and copying at the
principal offices of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NASDAQ-2011-091, and should be submitted on or before
August 26, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19911 Filed 8-4-11; 8:45 am]
BILLING CODE 8011-01-P
